Gold is basically an indestructible material. It is one of the 92 naturally occurring elements found on earth and there is no natural substance that can destroy it.
It can be dissolved by chemical means, but even then it remains as gold, but just in a more widely dispersed state. It also has a high value-to-weight ratio and has various industrial uses due to the fact it does not corrode and is a very efficient conductor of electricity.
Many believe that the economist John Maynard Keynes called gold a “barbarous relic”, but that is not strictly correct. Keynes was discussing the flawed gold exchange standard used between 1922 and 1939, rather than gold itself. He was actually an advocate of gold for much of his career.
For retail investors, gold can be used for both tactical and strategic investment reasons. The tactical case is driven by a positive price outlook associated with strong demand and tight supply of the material.
As it is virtually indestructible, practically all of the gold that has ever been mined still exists, much of it in near-market form.
This attribute means the supply curve works in a different way to other assets. Supply can, at least theoretically, be readily mobilised from central bank reserves or by recycling gold from the jewellery sector or, to a much lesser extent, the industrial sector.
The ability to mobilise scrap fairly quickly and easily is a reason why the gold price tends to be less volatile than other commodities, such as oil or platinum, which can be far more vulnerable to supply shocks. Coupled with supply is liquidity.
When there is a discussion of the portfolio diversification benefits of “alternative” investments such as gold, it should be remembered that buying them is one thing; selling them when one needs the cash can be quite another.
Gold can be traded around the clock in large amounts, at narrower spreads, and more rapidly than many competing alternative investments.
The strategic case for investing in gold is driven by the investment diversification benefits of holding gold within a portfolio. Gold’s historic correlation to traditional asset classes, such as equities and bonds, is low. It is also far less tied to the movements of the broader commodity indices than is often expected.@Image-a522bbb7-293d-4330-9ffe-8966403151e5@
Gold is, in addition, distinguishable from many other financial assets through its absence of counterparty risk as, like all physical commodities, it bears no default risk and has no liability. Fiat money systems invariably end or mutate, while gold remains gold.
It has retained its value while various civilisations going back to Rome and before have come and gone. It also provides a valuable means of hedging against the vagaries of inflation, a function it has successfully performed for centuries.
